Effect of Debtors on Performance of Small and Medium Enterprises

Abstract

The paper assesses effect of credit sales on performance of small and mediumenterprises (SMEs) in Tanzania using the credit risk management perspective.Asymmetric information and trade-off theory of liquidity guided the studywhereby a dataset of 6,134 Tanzanian SMEs was used.   Descriptive andregression methods were used as analyses techniques. Results confirm thatmajority of SMEs sell on credit (54%).   Despite efforts they put into managingtheir debtors, 26 percent of them default. The results further showed that SMEsincur relatively high costs when managing debtors, an aspect, which hamperstheir performance.   Costs incurred relate to financing, administration and moralhazards problems. The paper contributes to asymmetric information and tradeoffof liquidity theories by showing how the relationship between SMEs anddebtors can be hampered by ex-post asymmetric information whereby debtors 2decide to act in their own interests but against seller's interests, a pattern, whichcontravenes terms of their contracts. The study highlights main challenges facedby SMEs while managing debtors. Bad debts put pressure on SMEs ' cash flowthereby limiting growth of their businesses. Education level was seen to beimportant when managing debtors.